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Can These Brewers Cash In on the Gluten-Free Trend?

While about 1% of Americans suffer from celiac disease, nearly 1 in 3 say they are cutting back on gluten. Brewers of all sizes -- from Craft Brew Alliance and Boston Beer to Anheuser-Busch InBev -- are putting products on the market to meet these demands. See who might be best-positioned to take share.

Some American brewers are ditching barley -- the foundation of beer for centuries -- for some of their beers in order to capitalize on a fast-growing trend in food and beverages: gluten-free. Instead, they are turning to things like sorghum -- best known as cattle feed -- rice, and other grains that don't contain the protein some consumers are trying to avoid.

The best-selling of these beers is Redbridge, an Anheuser-Busch InBev(NYSE:BUD) brew. That doesn't bode well for competitors. When the King gets out in front of a trend, you should expect him to stay there. But there are other, creative ways for brewers to play this, and craft brewers -- including Craft Brew Alliance(NASDAQ:BREW) and Boston Beer(NYSE:SAM) -- may have found ways to keep capturing a bigger share in this growing market.

It's not all about intoleranceLet's take a step back and look at why this is important. The gluten-free market overall is expected to grow by more than 10% per year through 2018. That growth is coming not only because more people are being diagnosed with gluten-intolerance conditions like celiac disease, which affects about 1 of every 100 Americans. It's also coming from people with no such dietary restrictions who are choosing to avoid the protein, believing it's a healthier choice.In fact, while just 1% of the U.S. population suffers from the disease, nearly one-third of Americans reported making a conscious effort to reduce their intake of gluten last year.

That's an important distinction, and it's why Craft Brew may be better-positioned to take some market share in gluten-free. Unlike Redbridge, Craft Brew's Omission brand is not made from grains like sorghum and rice. It's a barley beer, brewed using an enzyme that breaks down the gluten protein, essentially removing it from the drink. Craft Brew says it already meets the standards for gluten-free labeling, even if it isn't allowed to call its beer "gluten-free."

But the brewer has taken heat from critics who say that while the beer is very low in gluten, it still has some of the protein in it. That makes it a risky proposition for sufferers of celiac disease, whose digestive tracts could pay the price for drinking even a low-gluten beer, they argue.

We'll leave that to be sorted out by the FDA, Craft Brew, and the drinkers. But Omission is certainly no risky proposition for those roughly 100 million Americans looking to avoid gluten simply because they believe doing so makes for a healthier diet. And for those folks, Omission offers good beer. Beer writer and reviewer John Holl tells Thrillist.com: "If I hadn't been paying attention to what I was drinking, I would've just thought that it was a perfectly fine lager." He goes on to say that Omission's pale ale and IPA are also solid representations of their styles.

The apple of Boston Beer's eye?Boston Beer, the country's largest craft brewer, has no gluten-free beer on the market. But that doesn't mean it can't grab a growing share of the gluten-free beverage market. Boston Beer has the best-selling cider brand in the U.S. in Angry Orchard -- and ciders contain no gluten.

But it's the second, larger group of consumers -- the ones who can tolerate gluten, but just want to cut back -- for which ciders may have their biggest appeal. Those drinkers are typically health-conscious, and that's a crowd that's embraced ciders, according to industry analysts. Agata Kaczanowska, an analyst at IBISWorld, told Bloomberg Businessweek last year that cider's appeal as presumably a heathier alternative should not be underestimated.

Ciders are a growing market, but it's a competitive market, too. Heineken's Strongbow is a world leader, and Anheuser-Busch InBev's latest Stella Artois Cidre will carry the name of one of the world's most popular beers. A-B is rolling Cidre out across the U.S. just now.

The Foolish bottom lineAlthough Craft Brew has been on the receiving end of some criticism and concern over its use of barley in Omission, the biggest market for gluten-free beers shouldn't care about the distinction. (The celiac sufferers may not, either.) That's put the company in a good position to grab share in a growing market.

Meanwhile, Boston Beer has a nice alternative in its fast-selling Angry Orchard ciders. Both of these companies will have to compete against brewing giant A-B InBev, but both have proven capable of winning that battle before. Investors will want to keep tabs on how these products fare in the coming quarters.

Author

Fool contributor John-Erik Koslosky has been picking his own stocks since the market crashed in 2008. He aims for a mix of value and growth, but mostly, just looks to buy great businesses.
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